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For larger corporate entities that own or operate
affiliate or subsidiary corporations, whether or not they must file a tax
return including the tax information for these related companies is a central
concern. As reported by Martha Kessler for the Bloomberg BNA Daily Tax Report, on
June 30 Connecticut passed Public Act 15-244, the budget bill for the biennium
ending June 30, 2017. Provisions in the bill include mandatory combined
reporting for tax years beginning on or after Jan. 1, 2016.

Twenty-three of the 45 states that impose a corporate
income tax required corporate parents to file a combined return that includes
their subsidiaries’ tax information, according to the Bloomberg BNA 2015 Survey of State
Tax Departments,
Connecticut now adds another state to that group. Central questions involving
combined reporting are whether the state uses the unitary business or ownership
threshold to determine which entities are included in a combined group and
whether the state uses water’s edge or worldwide reporting as their default
method.

Connecticut’s new combined reporting standards will be
based on the “unitary business” definition, but also will have an ownership
threshold. Companies that have common ownership and are engaged in a unitary
business where at least one member is subject to Connecticut corporate income
tax must file a combined return. Common ownership means “that more than fifty
per cent of the voting control of each member of a combined group is directly
or indirectly owned by a common owner or owners.” Under combined reporting, a
unitary business “means a single economic enterprise that is made up either of
separate parts of a single business entity or of a group of business entities
under common ownership, which enterprise is sufficiently interdependent,
integrated or interrelated through its activities so as to provide mutual
benefit and produce a significant sharing or exchange of value among such
entities, or a significant flow of value among the separate parts.”

Connecticut has elected to make water’s edge the
default method for reporting while allowing elections for reporting on a
world-wide basis or an affiliated group basis. Under the default water’s edge
method, the combined group includes corporations that:

are incorporated in or formed under the
laws of the U.S. unless eighty per cent of both their property and payroll are
located outside the U.S. (and any territories or possessions);

are incorporated or formed anywhere if
twenty percent or more of their payroll and property are located in the U.S.;

earn more than twenty percent of their gross
income, directly or indirectly, from intangible property or service-related
activities, the costs of which generally are deductible for federal income tax
purposes; or

are incorporated in a deemed “tax haven”
unless it can be proven the corporation has incorporated in that jurisdiction
for a legitimate business purpose.

Connecticut is the latest state to join the trend
toward combined reporting, and have laid out clear standards for which
corporations must be included in the combined report. The impact of the new
reporting regime remains to be seen.

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